An investor puts $1,000 into a fund carrying a 5% front-end load. How much reaches the fund?
A$1,000, since the load is billed at redemption
B$995, since the load is one half of one percent
C$950, since $50 comes off the top as the load
D$900, since the load is taken twice on entry
Answer & Solution
Correct answer: C. $950, since $50 comes off the top as the load
1. A front-end load is a sales charge on purchases, typically paid to the broker selling the shares.
2. Five percent of $1,000 is $50, and that $50 comes off the top of the investment.
3. The remaining $950 is what actually buys fund shares.
4. A front-end load therefore reduces the amount invested from the first day.
5. Charging at redemption instead describes a back-end load, where all the money goes to work at purchase.
6. Reading 5% as one half of one percent gives $995 and is a decimal slip.
7. Nothing in a front-end load is charged twice, so $900 has no basis.
_Source: US SEC Office of Investor Education and Advocacy, "Mutual Funds and ETFs: A Guide for Investors", section Fee Table: Shareholder Fees for mutual funds_
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